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On Our Radar

It is Listed And It is Surging: Switzerland's Central Bank -- Update

ZURICH – The Swiss franc may be slightly out of favor in markets, but investors are loving the bank that prints it: the Swiss National Bank.

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Shares in the SNB, one of the few central banks with a listed stock, have surged in recent days, pushing them over 3,000 francs a share earlier this week after a near 50% rally since July 19. They retreated a bit Thursday but are still up 33% this month and over 100% on the year.

Shares of other listed central banks, such as Belgium and Japan's, have stagnated in recent months.

It is difficult to pinpoint precisely why SNB shares are August's flavor of the month and analysts don't cover this bank in the way they do commercial lenders. Central banks aren't in the business of optimizing shareholder value; they are supposed to keep inflation low and, in Switzerland's case, keep the currency from getting too strong which weakens consumer prices while harming exports.

Yet its high stock value makes some sense. The SNB is a massive investment manager with around $750 billion in foreign assets on its books. The SNB built that portfolio by printing its own money and buying stocks and bonds, all in an effort to weaken the franc.

Things have broken Switzerland's way this summer with the SNB's share-price surge coinciding with the euro strengthening against the franc. Much of the SNB's foreign assets are denominated in euros, so when the euro strengthens those assets are worth more in franc terms.

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"In my view that was the trigger," said Alexander Koch, economist at Raiffeisen Schweiz, referring to the euro's rise against the franc that intensified in late July. Mr. Koch, who personally owns one SNB share, said official data in early August showing an increase in the value of the SNB's foreign reserves also helped the share price.

For instance, the SNB had EUR282 billion--equal to 308 billion francs--in euro assets on its books at the end of June. Since then, the euro has risen 4% against the franc and fetched just under 1.14 francs Thursday, making that pile worth over 10 billion francs more.

"The odds are very high that for 2017 as a whole the SNB will post high profits" and pay its dividend, said Mr. Koch.

So here is a bank that prints its own money, invests it and makes money when it weakens its own currency. Sounds like a good deal. But there are some caveats.

While the appreciation in the value of its holdings strengthens the SNB's underlying finances, private investors don't see the proceeds. The dividend is tiny at 15 francs a share no matter how big the profit. There are only 100,000 shares outstanding and the stock is thinly traded with only about 100 changing hands on an average day. Private shareholders have little or no say over who manages the bank or how it is run. The SNB is mostly owned by Swiss states, known as cantons, and cantonal banks.

But like any asset, SNB shares are ultimately worth whatever people are willing to pay for them. And these days, it is a pretty steep price.

Indeed, Mr. Koch is trying to sell his one SNB share, reasoning that 3,000 francs is a steep price for such a low dividend.